And Then There Were 13: Indonesia Rejoins OPEC

Indonesia’s return to the oil cartel will have some interesting implications.

By Kirstin Berndt for The Diplomat

December 02, 2015

Just days remain before Indonesia regains formal OPEC membership at the cartel’s December 4meeting in Vienna. The move has many in the energy industry still scratching their heads at OPEC’s latest direction. In an environment of rock-bottom oil prices, adding to the global energy surplus through the integration of an additional member appears counter-productive.

Indonesia is hardly an influential player in the energy market. The country renounced its membership in 2009 because it had become a net energy importer rather than a net producer, and not much has changed. Indonesia’s re-integration will add roughly 825,000 barrels a day to OPEC’s total output – around 1 percent of total global production. This meager contribution will place the country alongside OPEC’s least significant producers such as Libya and Ecuador.

Yet even this small output increase will affect OPEC in an era of unprofitable production. For Saudi Arabia, this aligns with the strategic goal of increasing market share, however incrementally. OPEC’s more desperate members, however, will not be pleased by the addition of another voice to the bargaining table. Venezuela, Nigeria, and other struggling nations have long been pressuring Saudi Arabia to cut production, and will now face an incoming member with very different priorities. While OPEC’s struggling producers have structured their economies around high oil prices, Indonesia will continue to remain a net importer of oil with a vested interest in keeping oil prices low to accelerate domestic growth. Indonesia has a challenging road ahead to regain influence among OPEC’s disgruntled members, especially after a seven-year hiatus.

The answer to Saudi Arabia’s latest strategy to re-integrate Indonesia into the fold is both market-driven and geopolitical. With the abundance of North American shale and the slowing of China’s economy, OPEC is increasingly driven to scout out new energy customers. Indonesia’s high population and enormous growth potential will demand greater energy resources over the next few decades. Home to the world’s fourth largest population, Indonesia is the world’s 10th largest economy with a growth trajectory expected to skyrocket over the next few decades. The projected energy consumption of the entire Southeast Asia region, spearheaded by Indonesia, is projected to rise 80 percent by the year 2040.

As the sole Asian member of OPEC, Indonesia will serve as a geopolitical gateway into Southeast Asian and East Asian markets. Indonesia overlooks the Strait of Malacca, through which 15.2 million barrels of oil transit every day from global suppliers to consumers in Asia. An OPEC member at the helm of one of the world’s major oil transit routes can only enhance the security of OPEC supplies.

Indonesia itself, of course, will reap the greatest benefits from OPEC membership. Indonesia is well aware of the challenges inherent in a growing, urbanizing population. Having guaranteed energy suppliers among OPEC nations will increase overall energy security, and Indonesia will benefit by shoring up relationships while OPEC nations are frantic for consumer markets.

Indonesia needs OPEC technological expertise and investment to develop its domestic resources. The country’s aging energy infrastructure is desperately in need of modernization and the risky business environment has historically discouraged foreign investment. Already, Saudi Arabia and Indonesia have announced plans to construct a joint oil refinery.

The addition of Indonesia to the bargaining table adds another layer of complexity to a cartel already plagued by internal disagreements and declining revenues. With competing goals for pricing and production levels, the future of OPEC will depend on Saudi leadership and diplomacy. Yet OPEC’s more frustrated members cannot help but notice that Indonesia split from the cartel and rejoined with relatively little fanfare. Indonesia’s “revolving door” membership may encourage other countries to walk away and re-enter the cartel when it better suits their interests. In an uncertain energy future, Saudi Arabia may find the disparate aims of its members increasingly difficult to manage.

Kirstin Berndt a graduate student at New York University’s Center for Global Affairs. My research focuses on the intersection of energy geopolitics and transnational security. I have previously published articles at Breakingenergy.com and the Geopolitical Monitor.